Mba-Financial Management

In: Business and Management

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AMBIT RISK MANAGEMENT & COMPLIANCE

LIquIdITy RISK –
New Lessons and Old Lessons

TABLE Of CONTENTS

2 3 12 14 14 14 17 19

Introduction Measuring Liquidity Risk Managing Liquidity Risk Standby Liquidity Reserve Syndication, Sales and Securitization Tactics for Liability Diversification Other Liability Management Tactics Conclusion

Liquidity Risk- New Lessons and Old Lessons

2

INTROduCTION
The flight to quality that began in 2007 reminded many banks of the importance of liquidity risk management. While maintaining ample liquidity for significant stresses is a costly proposition, there is a balance to be struck between short-term earnings and long-term survival. The crisis also reminded us that liquidity risk is a consequential risk. However, this time, none of the usual suspects such as credit and trading losses triggered the liquidity stresses. Instead, liquidity problems resulted from the belated recognition of risk in mortgagebacked securities which led to a massive flight to quality and, for some banks, the need to fund off-balance sheet commitments. While the initial cause of both problems was excessive exuberance in uS residential mortgage underwriting, problems quickly spread.

3

Liquidity Risk- New Lessons and Old Lessons

I. MEASuRING LIquIdITy RISK
In today’s complex product market, some banks have far more complex liquidity risks than others. Smaller, conservatively-run banks tend to make greater use of relatively reliable core deposits and less use of potentially volatile short-term market instruments. Conversely, larger banks and smaller banks with aggressive funding strategies have recently made greater and more aggressive use of funding from other banks and the capital markets for their funding needs, including brokered Cds and complex securitizations – such as asset-backed…...

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